Why you should forget the Fed and focus on the unemployment rate

Does it really matter whether the Fed is going to taper now or later? Maybe not, because the QE3 program heavily depends on economic performance. The two indicators analysts particularly follow are the unemployment and inflation rates. After all, the Federal Reserve Act states, “The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

Since peaking in 2009 at 9.9%, the unemployment rate has gradually fallen. It now stands at 7.3%, as of August, on a seasonally adjusted basis.

The disadvantage of using the unemployment rate as a measure of employment is that it only tracks the number of people employed over those who have jobs and are actively searching for work. This doesn’t include people who are discouraged from searching for work because they weren’t able to find a position for quite a long period. Perhaps it’s important because each economic cycle demands different skill sets and the unemployment rate generally provides a better picture of the labor market than is widely reported.

With the unemployment rate averaging 5.8% since 1948—and even bottoming below that before major recessions kicked in—there’s much incentive for the Fed to keep its QE program and loose monetary policy out there despite possibly cutting back a little if the economy picks up. While we’re close to 7.0% (the rate at which the market expects the Fed to start cutting back its quantitative easing program), there’s still a bit more to go. A lower unemployment rate, unless driven by an increase in discouraged workers, would contribute to higher food retail sales. This is long-term positive for companies like McDonald’s Corp. (MCD), Yum! Brands Inc. (YUM), Chipotle Mexican Grill Inc. (CMG), and AFC Enterprises Inc. (AFCE) as well as the Dow Jones Consumer Services ETF (IYC).

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